When holiday markets quash volume and new items repetitive, it provides an opportunity to catch up with some general concepts in a style I like to call “Quick Hitters.”
***First, the IMF and World Bank were meeting in Lima, Peru over the weekend and all the voices of global finance–trained by Stanley Fischer–weighed in on the FED‘s inability to make a decision. The FOMC board seems to be terrified of being responsible for the global economy slipping into a recession. The Wall Street Journal had a front page story titled, “World To Fed:Get On With It.” Many of the world’s central banks are suffering from Fed fatigue as the constant barrage of Fed speeches continued to provide on/off drama of a rate hike or no rate hike. The FOMC is beginning to remind me of the Kardashians as the constant back and forth of to raise or not prices in a “DRAMA PREMIUM” to all asset classes.
The deputy governor of Bank Negara of Malaysia perfectly summed up the Fed’s dithering: “If it is a case that the emerging markets have taken on too much debt, there will be a day of reckoning. Delaying an interest-rate hike does not necessarily address that issue.” The mood from other emerging market financial leaders was of a similar theme as they feel they are prepared for the “after shocks” because so much risk has already be reduced since emerging market equity debt and currencies have suffered from Fed fear. The students seem to be far better prepared for action than the theoreticians heading the FOMC.
***The second major theme emanating from the Lima meeting was the need for increased fiscal stimulus by the world’s developed economies and China. The groundwork for the fiscal side of the equation was preemptively revealed in a major op-ed piece in the Financial Times by Professor Larry Summers. It advised that monetary policy has run its course and it is important that governments and global lending institutions like the IMF step in and fund massive infrastructure projects. Summers pushes his concept that global bond markets are telling officials that there is too little sovereign debt as prices are historically low. (Digression: I don’t know how you measure the signals being sent by bond markets because central banks have broken the signalling mechanism through massive intervention via worldwide QE programs.)
Professor Summers then follows up his assumption about low bond prices with these thoughts: “History tells us that markets are inefficient and often wrong in their judgments about economic fundamentals. It also teaches us that policymakers who ignore adverse market signals because they are inconsistent with their preconceptions risk serious error.” Markets are inefficient but heed their warnings! The bottom line is that Summers is getting ahead of the push for a massive global fiscal stimulus program. Ultimately, he believes that “if I am wrong about expansionary fiscal policy, the risks are that inflation will accelerate too rapidly, economies will overheat and too much capital will flow to developing countries.”
I give Professor Summers a great deal of credit because he invokes the idea of BEING WRONG. This is something the FED never considers for in its policy approach the models will always prove out over time (dynamic stochastic general equilibrium). Summers believes the error of too much inflation can be dealt with by employing the type of tools the FED has long utilized to curtail rising prices: The basic element of the asymmetric nature of central banking. It’ easier to stop inflation than prevent a deflationary spiral.
There’s a perplexing issue following the IMF meeting and the pressure for increased fiscal stimulus. In the EU, eurocrats in Brussels were admonishing the Spanish government for failing its 2016 excessive budget deficit. While Spain is being lauded as the economic miracle of Europe, proving that austerity paves to the way to growth–even with an overvalued currency over which it has no authority. The talking heads in the financial media take a Panglossian view of the Spanish economy but the explosion in government debt during the past five years masks the underlying structural problems. The European Commission is pushing Spain to tighten its government spending in direct contradiction to what the key discussion was at the IMF meeting about fiscal expansion. It is not easy trying to understand the cognitive dissonance that plagues the global macro world.
***Third, today the GOLD/YUAN reached its 200-day moving average. This is important for the GOLD is gaining on the YUAN even as the Chinese currency has strengthened since its surprise devaluation in August. Many articles have been written about the vast amounts of money leaving China as the elite transfer funds outside the reach of the Politburo control. The massive flows have forced the Chinese Government to buy YUAN in the market to stem its depreciation.
This is theoretical and needs to be analyzed further, but there is little doubt that U.S. Treasuries are being sold by the Chinese authorities to raise dollars to sell in the market to buy YUAN. Many elements are in play in the flow of funds but if there is massive amounts of money seeking safer havens the Chinese government MIGHT have to resort to some type of exchange controls. If that were to occur, GLOBAL CAPITAL would become fearful about fiat currency and GOLD would become a major element in the search for havens. The GOLD/YUAN becomes a barometer for angst in this situation but as the chart reflects there been some false signals from this relationship.
Readers of NOTES know that I have looked upon the price of GOLD in YUAN as a major component of the GOLD investment scenario. I advised that $1048/oz of gold was an important support level for that was the price that India contracted to buy 200 tons of gold from the IMF (and angering the PBOC who was trying to exchange dollars for hard assets. It is Chinese concerns about its low GOLD reserves in an unstable financial world that makes this relationship so relevant.